Mortgage rates have been consistently increasing since the beginning of 2022 and show little sign of stopping. Rates have risen to their highest levels in almost 13 years after hitting record lows during the COVID-19 pandemic. Increases in rates are due to the impact of factors like inflation, which recently reached a 40-year high, as well as interest rate increases enacted by the Federal Reserve, which raised rates this year, for the first time since 2018.
Rising mortgage and refinance rates can add thousands of dollars in interest over the course of your mortgage, but that doesn’t necessarily mean it’s a bad time to refinance. When rates are going up, they generally continue to increase, so if you were hoping to refinance, it’s better to lock in a rate now and save yourself valuable percentage points down the line on a refinance rate.
“Mortgage rates have risen dramatically this year, and are expected to continue their ascent,” said Dave Steinmetz, division president of origination services at ServiceLink. “Rising rates can be attributed to federal reserve action that has been motivated by a variety of factors, most notably, the need to tamp inflation.”
Here’s everything you need to know about refinance rates and how they work.
When you refinance, you pay off your existing mortgage with a new home loan that comes with new rates and terms. If you secured your existing mortgage when interest rates were higher than they are today, refinancing at a lower rate can reduce your monthly payment or allow you to pay off the loan faster (and sometimes both).
There are many valid reasons to refinance.
Common scenarios include:
While lower monthly mortgage payments sound enticing, refinancing isn’t always a smart financial move.
Although refinancing can save you money, it can also come with hefty upfront fees. Since a refinancing loan is a new home loan, you’ll have to pay closing costs just like you did for your original mortgage. Those fees range between 3% to 6% of the loan amount — or $9,000 to $18,000 for a $300,000 refinance, for example.
A refinance may have fixed fees or variable costs that depend on the size of your loan. According to Fink, refinancing is still worthwhile — even if you have a large loan balance — because reducing your interest rate can save you tens of thousands of dollars in interest over the long term.
Keep in mind, it could take a few years to recoup your refinance fees. If you expect to move in a few years, the trouble and expense of refinancing now might not make sense.
Refinancing also may not be worth it if you’ve owned your home for a long time. Mortgages are designed so that your highest interest payments come during the early years. The longer you’ve had the mortgage, the more your monthly payment goes to paying off the principal. If you refinance later in the loan term, you’ll revert to primarily paying interest instead of building equity.
Several factors determine the refinance rate you’ll pay. One of the most important factors is your credit score; people with lower credit scores may pay a higher interest rate than someone with a better score.
The length of the loan also affects your refinance rate. A 30-year note will have a higher rate than a 15-year mortgage. Fink suggests finding a lender who will offer a “float down” provision, which can help you take advantage of subsequent rate drops — even after you’ve locked in.
For example, if your rate is locked in for 30 days and rates drop within that time period, you’ll be able to lock in at the lower rate. A float down option will cost you — typically 0.5% to 1% of the loan amount — but it could save you money if rates drop.
“You usually have to opt in to the lower rate, so be sure you pay attention to daily rate changes,” Fink said.
Your credit score will be a factor in your refi options, as will the type of home loan you’re pursuing. A conventional loan, for example, usually requires a credit score of 620 or higher.
You may qualify for a Federal Housing Administration refinance with a credit score of 580, however. And if you already have an FHA mortgage, you may qualify for a streamline refinance that requires less credit documentation.
If you’re hoping to refinance to lock in a lower rate, a high credit score will put you in a better position. Typically, the higher your credit score, the lower your rate. If your credit rating is too low, consider delaying your refinance application while you work to improve your credit score.
You can improve your score by:
Even though rates are low right now, it’s a good idea to shop around and research different mortgage lenders before refinancing your home loan. Be sure you understand all of the up-front fees and use a mortgage calculator to help you determine how much you’ll be expected to pay at the time of closing. It’s also important to calculate how much you could save by refinancing into a shorter loan term, if you want to maximize your savings.